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Prospectus under Company Law

Introduction

A company is bound to raise finances for its sustenance and growth. Therefore,
in finance a prospectus is a disclosure document that describes a financial security
for potential buyers. A prospectus commonly provides investors with material
information about different securities, mutual funds, stocks, bonds and other
investments. It also provides with information like description of the company's
business, financial statements, biographies of officers and directors, detailed
information about their compensation, any litigation that is taking place, a list of
material properties and any other material information.

Company prospectus is released by company to inform the public and investors

of the various securities that are available. These documents describe about
mutual funds, bonds, stocks and other forms of investments offered by the
company. A prospectus is generally accompanied by basic performance and
financial information about the company.

Prospectus is a document issued in the form of a circular, notice or advertisement

to attract the public to invest in the company. The company invites public by
means of prospectus. It helps the public decides whether to purchase share of the
company or not. Therefore, prospectus plays an important role in the process of
floatation.

Whenever a prospectus is issued it is an invitation to offer. The company makes

an invitation and the public make offer to the company (offeree). The company
accepts the offer (acceptance). The money paid is consideration. In this way a
contractual agreement is formed between the public and the company.

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Definition of Prospectus

A prospectus, as per section 2(70) means any document described or issued as a

prospectus and includes a red herring prospectus or shelf prospectus or any notice,
circular, advertisement or other document inviting offers from the public for the
subscription or purchase of any securities of a body corporate.

A document shall be called a prospectus if it satisfies two things:

1. It invites subscription to, or purchase of shares or debentures or any other

security of a body corporate.

2. The aforesaid invitation is made to the public.

WHICH COMPANIES ARE REQUIRED TO ISSUE PROSPECTUS?

1. Every public listed company who intends to offer shares or debentures of the

company to the public.

2. Every private company who ceases to be a private company and converts into
a public company and intends to offer shares or debentures of the company to the
public.

Contents of prospectus

As per the requirement of section 26 of the Companies Act, 2013 contents of a

prospectus has been categorized into 3 heads: -
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(i) names and addresses of the registered office of the company, company
secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if
any, underwriters and such other persons as may be prescribed;

(ii) dates of opening and closing of the issue.

(iii) a statement by the BOD of separate bank account.

(iv) details about underwriting of the issue.

(v) consent of the directors, auditors, bankers to the issue, expert’s opinion, if any,
and of such other persons, as may be prescribed;

(vi) the authority for the issue and the details of the resolution passed therefore;

(vii) procedure and time schedule for allotment and issue of securities;

(viii) capital structure of the company in the prescribed manner;

(ix) main objects of public offer, terms of the present issue and such other
particulars as may be prescribed;

(x) main objects and present business of the company and its location, schedule
of implementation of the project;

(xi) particulars relating to—

A. management perception of risk factors specific to the project;

B. gestation period of the project;

C. extent of progress made in the project;

D. deadlines for completion of the project; and

E. any litigation or legal action pending or taken by a Government Department or

a statutory body during the last five years immediately preceding the year of the
issue of prospectus against the promoter of the company;

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(xii) minimum subscription, amount payable by way of premium, issue of shares

otherwise than on cash;

(xii) details of directors including their appointments and remuneration, and such
particulars of the nature and extent of their interests in the company as may be
prescribed; and

(xiii) disclosures in such manner as may be prescribed about sources of

promoter’s contribution.

Kinds of prospectus

1. ABRIDGED PROSPECTUS

According to Sec. 2(1) of the Companies Act of 1956, a company cannot issue
applications for issue of share or debentures. It cannot do so if it does not contain
the salient features of the prospectus of the memorandum. This is known as
‘abridged prospectus’. In other words ‘abridged prospectus’ is a one that contains
the salient features of the memorandum of the prospectus.

2. DEEMED PROSPECTUS

Section 25 of the companies Act, 2013 provides that all documents containing
offer of shares or debentures for sale shall be included within the definition of the
term prospectus and shall be deemed as prospectus by implication of law.

Unless the contrary is proved an allotment of or an agreement to allot shares or

debentures shall be deemed to have been made with a view to the shares or
debentures being offered for sale to the public if it is shown

a) That the offer of the shares or debentures of or any of them for sale to the public
was made within 6 month after the allotment or agreement to allot; or

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b) That at the date when the offer was made the whole consideration to be
received by the company in respect of the shares or debentures had not been
received by [Link] enactments and rules of law as to the contents of prospectus
shall apply to deemed prospectus.

Additional requirement relating to deemed prospectus: -

(i) The net amount of consideration received or to be received by the company in

respect of the shares or debentures to which the offer relates;

(ii) The place and time at which the contract under which in the said shares or

debentures have been or are to be allotted may be inspected. Section 60, dealing

with the registration of prospectus applies to the deemed prospectus in terms of

section 64(4) and accordingly it renders the persons making the offer of sale to
the public as deemed directors of the company.

3. SHELF PROSPECTUS

Section 31- “shelf prospectus” means a prospectus in respect of which the

securities or class of securities included therein are issued for subscription in one
or more issues over a certain period without the issue of a further prospectus.

The provision of this section are as follows:

(1) Any class or classes of companies, as the Securities and Exchange Board may
provide by regulations in this behalf, may file a shelf prospectus with the
Registrar at the stage of the first offer of securities included therein which shall
indicate a period not exceeding one year as the period of validity of such
prospectus which shall commence from the date of opening of the first offer of
securities under that prospectus, and in respect of a second or subsequent offer of
such securities issued during the period of validity of that prospectus, no further
prospectus is required.

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(2) A company filing a shelf prospectus shall be required to file an information

memorandum containing all material facts relating to new charges created,
changes in the financial position of the company as have occurred between the
first offer of securities or the previous offer of securities and the succeeding offer
of securities and such other changes as may be prescribed, with the Registrar
within the prescribed time, prior to the issue of a second or subsequent offer of
securities under the shelf prospectus:

Provided that where a company or any other person has received applications for
the allotment of securities along with advance payments of subscription before
the making of any such change, the company or other person shall intimate the
changes to such applicants and if they express a desire to withdraw their
application, the company or other person shall refund all the money received as
subscription within fifteen days thereof.

(3) Where an information memorandum is filed, every time an offer of securities

is made under sub-section (2), such memorandum together with the shelf
prospectus shall be deemed to be a prospectus.

4. RED HERRING PROSPECTUS

Section 32 of the Companies Act, 2013 contains Red Herring Prospectus. The
process by which a company or a corporation makes its Initial Public Offering
(IPO) is threaded with various other formalities and ancillary procedures which
it must undertake in order to satisfy the Guidelines and Requirements issued by
SEBI, which is the regulator for security markets in India. These guidelines are
to be adhered to by the offering company after it decides to issue its debentures
and shares by making an offer to the public, in order to safeguard the interest of
the investors who choose may want to subscribe to the company’s shares. One
such guideline prescribes that the offering company disclose all the relevant
information about its business operations and financials so as to enable

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accountable decision making on the part of the investors. This is to be achieved

by issuing

a document, which is called the Red Herring Prospectus (RHP). The Companies
Act of 2013 (Hereinafter, the Act), which regulates the responsibilities of a
company mandates the issuance of a RHP by a company before it makes a public
offering of securities.

5. STATEMENT IN LIEU OF PROSPECTUS

A public company, which does not raise its capital by public issue, need not issue
a prospectus. In such a case a statement in lieu of, prospectus must be filed with
the Registrar 3 days before the allotment of shares or debentures is made. It
should be dated and signed by each director or proposed director and should
contain the same particulars as are required in case of prospectus proper.

Mis-statement in a prospectus

According to section 34(1) of the Act, a statement included in a prospectus shall

be deemed to be untrue:

(a) If the statement is misleading in the form or context in which it is included or

(b) Where any inclusion or omission from prospectus of any matter is likely to
mislead.

Thus, in regard to considering a prospectus as fraudulent, it is not necessary that

there should be false representation in it even if every word included in the
prospectus is true, the suppression of material facts may render it fraudulent. To
judge its effect, it should be read as whole.

Case law:

1. M.K. Sreenivasan case

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In this case the prospectus gave an estimate of the profits to be earned by the
company from acquisition of the interest of the accused in T Ltd. And it did not
disclose that under the agreement with T Ltd. The accused has no interest in T
Ltd. That could be assigned, and also suppressed the fact that the accused were in
arrears in making payment of installment to T Ltd. And for this default the
company could cancel their contract.

The Madras High Court held that this was a case of suppression of material facts.
The reference to the assignment of the interest in the agreement with T Ltd. Was
on the face of the prospectus itself a half truth intended to deceive and no better
than a downright falsehood. In the light of the circumstances, the failure to
disclose that theaccused were in arrears with their payment and that the agreement
might be cancelled for that reasons was also intended to deceive and amounted to
a deliberate suppression of material facts.

2. Rex v. Kylsant case

All the statements included in the prospectus issued by the company were literally
true. One of the statements disclosed the rates of dividends paid for a number of
years. But, dividends had been paid not out of trading profits but out of realised
capital profits. This material fact was not disclosed.

Held that the prospectus was false in material particulars and Lord Kylsant the
managing director and chairman who knew that it was false was held guilty of
fraud.

Liability for mis-statement in prospectus

 Criminal liability for mis-statement in prospectus(section 34)

Where a prospectus, issued, circulated or distributed:

1. Includes any statement which is untrue or misleading in form or context in

which it is included; or

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2. Where any inclusion or omission of any matter is likely to mislead; every

person who authorizes the issue of such prospectus shall be liable under section
447 i.e. fraud.

Defenses available in this section are:

1. Person proves that statement or omission was immaterial;

2. Person has reasonable ground to believe and did believe that statement was
true; or

3. Person has reasonable ground to believe and did believe that the inclusion or

omission was necessary.

 Civil liability for mis-statement in prospectus(Section 35)

Where a person has subscribed for securities of a company acting upon any
misleading statement, inclusion or omission and has sustained any loss or damage
as its consequence, the company and every person who:

1. is a director at the time of the issue of prospectus;

2. has named as director or as proposed director with his consent;

3. is a promoter of the company;

4. has authorised the issue of the prospectus; and

5. is an expert referred to in sub-section (5) of section 26

shall be liable to pay compensation to every person who has sustained such loss
or damage. This civil liability shall be in addition to the criminal liability under
section 36. Where it is proved that a prospectus has been issued with intent to
defraud the applicants for the securities of a company or any other person or for
any fraudulent purpose, every person shall be personally responsible, without any
limitation of liability, for all or any of the losses or damages that may have been

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incurred by any person who subscribed to the securities on the basis of such
prospectus.

Defences under this section are:

1. He has withdrawn his consent or never give his consent;

2. The prospectus was issued without his knowledge or consent and when he
became aware, gave a reasonable public notice that prospectus was issued without
his knowledge or consent.

Conclusion

As soon as company is registered by the promoters, it is ready for starting

business. The company raises necessary capital from the market by means of
issuing shares or debentures of the company. Before collection of capital the
public is made known about the details of the company. These are mentioned in
a document called prospectus. It helps the public decides whether to purchase
share of the company or not. Therefore, prospectus plays an important role in the
process of floatation.

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